Should dominant companies be split

Written by Pradeep S Mehta | Updated: Nov 15 2011, 07:07am hrs
In my last column (Against abuse of pharma FDI, FE, October 31) on the hot issue of pharma takeovers, I had written that the Competition Commission of India also has the power under Section 28 of the Competition Act, 2002 (CA02), to ask a company to split up, if it is found to be abusing its dominance.

Let us look at the history of our competition regime since the days of the MRTP Act. It also had a provision to split companies if they were found to be abusing their dominance, though they never used it. Other than this section, all other merger related sections were thrown out when the law was amended in 1991 as part of our reforms processes. The reforms also enabled the smoother entry of foreign companies, which was further facilitated by removing restrictions under FERA. Consequently, there were no competition checks on mergers and acquisitions triggered by a large number of MNCs.

Expectedly, increased concentration in many markets was soon to be followed by various forms of anticompetitive practices, including cartelisation. In the cement industry, for example, an increase in foreign shareholding in the Indian cement companies occurred in India during the post-1991 period, including the taking over of Tiscos cement plants by Lafarge during 1997-99. Swiss cement company Holcim also entered through buying a stake in Gujarat Ambuja Cement, before the two companies took up a 50% stake in Associated Cement Companies (ACC). Indian cement companies, not to be outdone, also participated in the acquisition spree, with AV Birla Group consolidating its cement business under Grasim. It acquired Shree Digvijay Cements and Dharani Cements, not to mention the acquisition of Narmada Cements from Chowgules by Larsen & Toubro (L&T). However, the increased concentration soon turned into an opportunity for cartelisation, given that in March 2008, cement companies like ACC, Lafarge Cement, Birlas Grasim and four other top cement producers were found guilty of cartelisation by the MRTP Commission. They acted in concert to raise prices in select markets through the Cement Manufacturers Association.

In the tyre industry, JK Tyres formed a technical tie-up with Continental AG of Germany; South-Asian Tyres Ltd (SATL) became a fully-owned Goodyear Company in 1998 and Apollo Tyres bought the South Africa-registered Dunlop Tyres International in 2006. However, in May 2008 the MRTP Commission had issued notices to six leading tyre makers including JK Tyres, Ceat Tyres, Goodyear India, MRF Tyres and Apollo Tyres, accusing them of indulging in price-fixing cartelisation. Other firms which also got dominant through mergers like Hindustan Lever Limited, a subsidiary of Anglo-Dutch multinational company, Unilever and Coca-Cola India have also been in trouble with the MRTP Commission for abuse of dominance.

The notification of the CA02s merger provisions has come under this background, where previous mergers implied that the CCI is supposed to oversee highly concentrated markets. These give rise to an important question: can CCI do anything to ensure that there is competition in highly concentrated markets by carrying out a competition analysis in retrospect

A look at the CA02 reveals that the parliament had this in mind when developing the Act. Under section 28 (1) of the Act, CCI can direct that a dominant enterprise be split up to ensure that such an enterprise does not continue to abuse its dominant position. This implies that there is some scope for CCI to take a look at dominant enterprises, including those that got the dominance through mergers that took place before its time, and order that such enterprises be divided if the dominance results in abuse. This process is generally considered more difficult in comparison to controlling dominance when mergers are taking place. Although difficult, the exercise can still however be successfully carried out as evident from examples from other jurisdictions.

One famous example is the Standard Oil Company of New Jersey, which had become dominant by buying most of the oil refining companies in the United States. By eliminating competitors, the company became dominant, giving rise to anticompetitive practice fears. As a remedy, in 1911 the courts ordered the subdivision of Standard Oil into several geographically separate and eventually competing firms. Another well known example involved the breakup of American Telephone and Telegraph Company (AT&T operating under the brand name of Bell) in 1982-84 as a way of containing its dominance. The companys operations were split into seven independent Regional Holding Companies (Baby Bells), which resulted in the companys dominance being reduced.

The Brazilian competition authority, CADE also flexed its muscles by ensuring that dominant firms be divided to contain possible abuse of dominance. One such company owed its dominance to a merger which was rushed through by the government with the intention of creating a national champion, resulting in the creation of a dominant company in the processed foods industry: Brasil Foods. CADE forced a breakup of the company after it was already operational, by requiring it to sell 80% ownership of one of its flagship brands, a situation which ushered in more competition. In Europe, the European Commission also ordered an electricity giant to divest some of its generation capacity as a way of containing its dominance. The Germany-based E.ON reached an agreement with the EC in November 2008, where it committed to divest about 20% of its generation capacity and its transmission systems business.

The Competition Commission of South Africa also imposed its first structural remedy on a case involving abuse of dominance in July 2010. The Commission found Sasol Chemical Industry guilty of abuse of dominance, in particular exclusionary conduct and price discrimination in the supply of ammonia and derivative fertiliser products. Sasol was given twelve months to divest five of its fertiliser blending facilities as a way of opening up the fertiliser market and allowing the entry of new players into the industry.

It is, therefore, apparent that there is still some scope for CCI to intervene in highly concentrated markets, particularly those that got dominant through mergers and acquisitions prior to the CA02 merger regulations came into force. The division of dominant enterprises that owe their dominance to mergers can also be regarded as a fair exercise to ensure that those firms that concluded their deals before the merger regulations do not unfairly enjoy the benefits they got through deviation from competition norms; an act which other firms cannot replicate. Another advantage with this remedy is that the financial thresholds need not apply to the firms when being asked to divest or split up. The financial thresholds for merger reviews are high and, thus, some of the mergers may not even fall under the review parameters of CA02.

Although breakups have been less favoured than conduct remedies such as access remedies, they are more effective in correcting the identified anticompetitive conduct. Conduct remedies are generally favoured simply because the defendants would likely be more willing to accept them than breakups. Courts and competition agencies are also seen to be reluctant to break up what has been a successful firm because once broken up the firms might cease to be successful and they would get the blame. However, if competition objectives are to be met, breakups are more ideal. While prevention is better than cure, it is apparent that CCI also has some medicine to cure abuses that could have been prevented through merger reviews.

The author is secretary general, CUTS International. Cornelius Dube of CUTS contributed to this article